Bill Kerr: Welcome to the Managing the Future of Work podcast from Harvard Business School. I’m your host, Bill Kerr. This episode is one of a series of special dispatches on the sweeping effects that Covid-19 is having on society, the economy, and the future of work. My guest today is Harvard Business School senior fellow Karen Mills. Karen directed the Small Business Administration from 2009 to 2013 and was a member of President Obama’s cabinet. She is the author of Fintech, Small Business & the American Dream, which we featured in a podcast this past August. Karen has recently been advising Congress and fintech companies on how best to help small businesses through the Covid-19 pandemic. Welcome, Karen.

Karen Mills: I’m so pleased to be talking to you. This is quite a difficult time for many folks, including small-business owners here in America.

Kerr: Karen, in the financial crisis, you had a front-row seat—in fact, an active hand—in crafting the response for small businesses to help them out. What do you see as similar and different about the crisis this time?

Mills: Well, I was in the seat in 2009 in the first quarter, and it was a pretty devastating time for the American economy and for small-business owners. But I have to say, I think this is much worse, particularly for America’s Main Street small businesses. You know, it’s a completely different crisis, because the problem in 2009 was that banks had gotten overextended with all the bad mortgages, and they just stopped lending to small businesses. And we had to do some things, pretty aggressive things, at the SBA. To get them back to lending, we raised our guarantee rates to 90 percent. And we got a lot of banks, 1,000 banks, back to lending. Well, today that’s not the problem. Today the problem is, of course, that we have a health crisis and we have to—for the good and safety of small-business owners, their employees, and really all of us in the community—we’ve had to shut down all across America. And for many small businesses, this is a life-threatening moment, because America’s small businesses have very low cash buffers. If you look at the 30 million small businesses, the average cash on hand has been, in the past, 27 days. And we have been shut down now in most places for more than 27 days. So you can understand that small businesses immediately saw that this was potentially going to cause them to close their doors. A really difficult moment.

Kerr: So maybe you can help us explain a little bit more “27 days cash on hand.” Help clarify. That means that, without more incoming revenue, we have the financial cushion to allow for 27 more days of activity.

Mills: That’s exactly right. If you think about a business owner with the cash spigot suddenly turned off, the question is, how long until you run out of money? And as a small-business owner, if you run out of money, you’re dead. So small-business owners immediately said, “I have to stop the cash outflows.” And the first and largest one is usually paying your people. Now, in the American economy, we don’t want to stop paying all of our people, because they will be unemployed, and they will be in dire circumstances. So one of the policy solutions that we have seen play out in the last month has been this federal program to get money into these small businesses in order for them to pay their people for eight weeks. The initial thought was, if you just allow these small-business owners to keep their payrolls, then they would be able to reopen. And one of the driving issues is, we don’t want to lose a lot of these small-business owners. I am very worried, I will say, that we are going to have a lot of business losses. We are just going to have a lot of bankruptcies, because there’s a lot of small businesses on the edge. But to the extent that we can mitigate small businesses just not reopening, we won’t be able to have a much more U-shaped recovery.

Kerr: So help us think about this policy choice. It seems like, with eight weeks of payroll protection, we’ve now extended to roughly a three-month runway for small businesses. But I guess there is a fundamental choice here about choosing to attach the support to payroll versus a direct transfer to small businesses. How do policy makers think about that?

Mills: Well, one of the really interesting choices that was made here in America put out a whole set of money to America’s small businesses through banks. Now, a lot of other nations have done some things where they have sent money directly into the hands of small-business owners to pay their payroll. But early on, there was a decision made that the banks were going to be the conduit, partly because in the US we actually don’t have a registry of small-business owners. I think the decisions to pay payroll are proving to be very smart, because what you want to be able to do is to get that money into the hands of employees for two reasons. You could give them money straight directly to them, and many of the individual programs do. But a secondary benefit, as I mentioned before, about paying small-business owners so they can pay their people is to keep the integrity of the business operational, and to allow a small-business owner to keep its employees—who might have health care, might have other benefits, might have been with that business for 20 or 30 years and be like family—to be able to maintain that small-business unit. And I think that was a very good intention. Now, we will find out when we see the analysis whether all this worked or it didn’t, because concurrently there was another policy which said we will give unemployment benefits at an elevated level of $600. And many small-business owners who have low-paid employees have said that their employees wanted to take the unemployment rather than stay on the payroll because they got more money. So we will see in the end. I think that’s going to be a very interesting repercussion of these dual policies that went out at the same time.

Kerr: Karen, there have been multiple phases to the support that we’ve been providing to small businesses. And, in fact, there’s been some kind of front-page controversy surrounding it. Can you help us walk through what is currently available? And also give us a sense of the size of these transfers. Are they small or large compared to the typical support we give small businesses?

Mills: The help available to small-business owners today actually comes in two forms. The first form was one of the SBA’s traditional programs. It is really a disaster loan. And it was part of the very first package that Congress passed in phase one. And it actually is perfectly adapted to this situation. It is a direct loan from government. And the government decided that they would actually make some of it a grant. And this is money, about $10,000, that goes into the hands of small-business owners that they don’t have to repay, that they can use for purposes of helping them through this disaster that is just not of their making. Fortunately, in the phase-three bill that was just passed a week ago, a refresh of this economic disaster recovery loan was passed as well. And there’s about, I think it’s $60 million that is going out for those loans as we speak. The more front-page news has been this payment protection loan, payroll protection loan bill [Paycheck Protection Program, or PPP] that has a very big number attached to it. The first number was $349 billion. And to give you some perspective, in all the time I was running SBA, we had some record years. The most we ever put through the system was $30 billion in a year. So now, in two and a half weeks, the SBA put out $349 billion through about 4,000 banks, which in many ways is a remarkable achievement. It came with lots of pain and suffering. Lots of big businesses got to the front of the line, and lots of small businesses really didn’t get theirs. I worked very hard, as you mentioned, with Congress—particularly with the Senate Democrats—to figure out how we were going to get more money into the hands of the smallest businesses, because they are the most vulnerable, and they are the ones we are the most concerned about being able to weather this storm. Fortunately, Congress did pass an even bigger bill than they originally anticipated, so they upped the bill to $310 billion for the PPP, and they set aside a portion of that to go through smaller banks. My original suggestion was actually something quite different—I think it actually would have been better—which is to set aside $100 billion for the smallest loans, and to process those smallest loans first. So we do know that most small businesses want a loan that’s under about $100,000, and we do know that the first tranches of loans were more than $200,000. So it is very important that this second set of PPP loans go to the smallest businesses.

Kerr: Karen, your book takes a close look at fintechs, and you’ve worked a lot with them. Can you explain what particularly they’re doing in this crisis and what role they can have for small businesses?

Mills: Fintechs are playing a really interesting role in dispersing this second set of PPP loans. It turns out that Square and PayPal and QuickBooks, which is Intuit, and also Kabbage and some others were able to get permission from Treasury to become SBA-approved lenders for this program. Unfortunately, they got it just as the first set of money was running out. So as the second set of money became available, they have been able to disperse much smaller-dollar loans to some of the more vulnerable small businesses. PayPal told me that they have 10 million—of the 30 million small businesses—as registered businesses where they see payments flows. So that helps in terms of making sure that these businesses are authentic, that they are not fraudulent businesses that are getting the money. In addition, Intuit used their TurboTax program, and they put about 200 programmers on it for a period of two and a half weeks, and they reprogrammed their engine so that they could help small, individual business owners. There are 24 million small-business owners who are sole proprietors—they don’t have any employees—and they really didn’t know how to use enough paperwork, or find the paperwork, to submit for the PPP programs. So we see some of these tech providers playing what I believe will be an absolute critical service in getting these public-policy initiatives more easily into the hands of the more vulnerable sole proprietors, independent contractors, and very small businesses who really need this money to survive.

Kerr: I guess, Karen, let’s end with the biggest question of all, which is, what does the future look like for small businesses in America? And I suppose, can there be a silver lining for this crisis?

Mills: So what does the future look like for America’s small businesses? When we get past this really most difficult moment, will things have really changed on Main Street? And I think the answer is yes. You’ve been doing a lot of work on the future of work, and I think small-business owners have been a bit slow to the party. But right now, you see small-business owners adopting much more online ordering, they’re adopting all kinds of remote activity that they might not have really had the inclination to do before, and they are looking at different sources of business and different sources of profit that they never had before. I tell small-business owners all the time now, just take a minute to step back from your business and think about what customers are driving your profit? What products are your best and most profitable sellers? And maybe it’s time to think about your business a little bit differently. Take out some of the costs, not do some of the things that maybe you’ve just done traditionally, but you don’t need to do in this moment in your business’s life. So one can hope that there will be some lemonade that we can make. And perhaps small-business owners will find technology more of an enabler, e-commerce more a part of their system. And I hope that communities will continue to see the value in their small businesses, and maybe even value them even more. And we’ll have “Small Business Saturday” more of the days of the week, because people know that small businesses are critical to their community, and this crisis has really shown how vulnerable they are.

Kerr: We thank Karen Mills for joining us today to talk about small businesses and the work that Congress is doing to help them weather this crisis. Thanks, Karen.

Kerr: Thank you for listening to this special episode of the Managing the Future of Work podcast. To find out more about our project on the future of work and for more information on the coronavirus’s impact, visit our website at hbs.edu/managing-the-future-of-work and sign up for our newsletter.